This week Peter talked to Jessica Mogilka, Executive Vice President at JLL, about national and global office market trends in the time of COVID-19. What we learned from that conversation is that there is a great deal of uncertainty about what is to come for the office market. Companies that occupy office space are pausing now to consider the best path forward for reentry. Employees' health and well-being is at the forefront of decision making, leading to new considerations of flexible work-from-home arrangements, redesign of office layouts, and the rise of new types of amenities.
While no one has the silver bullet answer to how the office sector will be impacted, there is agreement around the inevitability of disruption. Moody’s Analytics Real Estate Solutions (REIS) published a report on May 4th with two important office sector disruption insights. First, companies are deciding if a suburban office location will be preferable to central business districts (CBDs), to be closer to workers and to minimize the risk of exposure to COVID-19 in dense locations. Second, companies are deciding if they can operate with a smaller office footprint with a more flexible work-from-home policy.
The GREATER MSP intel team gathered office market insights from CoStar to help understand the regional characteristics that would be in play for both of these insights: increasing demand for space in suburban submarkets and reduction in office use intensity by major office users in our two central business districts.
Can the MSP suburban office submarket absorb increased demand?
Shifting demand from central business districts to suburban office locations, and vice versa, is not new to the Greater MSP office market or any major metro’s office market. Employers follow demographic shifts and when workers started moving out of the urban cores in the 1990s, office complexes followed. The story is similar for our region, and as a result there is now a robust selection of office space available in the periphery of the Minneapolis and Saint Paul central business districts. Since 2006, over 10 million square feet of office space has been added to the suburban inventory while central business districts have seen net zero growth. Annual inventory growth has consistently been higher in suburban submarkets than central business district submarkets, though growth in suburban submarkets has been steadying since 2016.
Source: CoStar, data extracted 5.13.20
Despite growing inventory in suburban submarkets, increased demand for space due to COVID-19 impact may pose a challenge in the Greater MSP region where suburban vacancy rates have consistently been lower than central business district vacancy rates. The vacancy rate for the two CBDs year-to-date is 11.6% while the vacancy rate for suburban submarkets in the region is 6.6%.
Source: CoStar, data extracted 5.13.20
Flexible work-from-home policies impact on office space utilization in central business districts
We are hearing from major employers that COVID-19 has accelerated confidence in the movement to a more flexible workplace arrangement where employees can work from home and maintain productivity. As companies in the Greater MSP region consider work-from-home flexibility it is possible that office utilization will shrink. This is particularly a challenge for higher density central business district locations where there is heightened concern about exposure to COVID-19.
To understand the potential impact of changing space utilization we focused on the existing central business district footprint of our Fortune 500 headquarter companies. Fortune 500 headquarters operations are looked to as leaders and early movers to establish new workplace policies that attract top talent. Six of the region’s Fortune 500 headquarters, Target, U.S. Bank, Ameriprise Financial, Ecolab, Xcel Energy, and Thrivent Financial are in central business districts occupying over 4 million square feet in total. The footprint grows by another one million square feet when including Securian, which is #506 on the Fortune list. Sixty-five percent of the Fortune 500 headquarters footprint in our central business districts is in Minneapolis and 35% in Saint Paul.
If the seven central business district-based Fortune 500 headquarters reduced office utilization by 30%, a possible scenario for reduction, approximately 3% of the total office footprint in our central business districts would be vacated. Under the 30% reduction scenario, 1.6 million square feet of office space would be added to the rolls, increasing the regional vacancy rate to 8.6%, from 7.8%. This vacancy rate is still lower than the U.S office vacancy rate of 9.9%. Adding 1.5 million square feet to the pool of available space may not seem significant, but there is concern that reduced utilization by these headquarter companies could domino through the market resulting in a larger impact to vacancy.
There is still substantial uncertainty around actual anticipated disruptions in our region and these insights should be considered for thought provocation. Companies are actively considering these kinds of decisions and will take individualized approaches based on factors that are unique to their workforce needs, existing footprint, and ongoing operating models.
The GREATER MSP Partnership is working to support the region during this time of uncertainty and rapid change. We are committed to being a source of sound, timely information about what’s happening in our regional, national, and global economy. Our goal is to help organizations stay connected and come together even while we’re forced to work apart. To do so, we are identifying new problems and developing smart, fast solutions through both new and strengthened partnerships. Click here to see more timely research and insights from the GREATER MSP Intelligence team and eye-opening conversations with local leaders.
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